9.29 Netflix, Inc

Netflix, Inc. provides on-demand Internet streaming video in the United States and Canada, and flat rate DVD-by-mail in the United States.

The company was established in 1997, started its subscription service in 1999 and by 2009 was offering a collection of 100,000 titles on DVD to over 10 million subscribers. Netflix had 27 million subscribers in September 2012. {17} Its streaming service was extended to Canada in 2010, Latin America in 2011, the UK and Ireland in early 2012, and to Norway, Denmark, Sweden and Finland in late 2012. {21}

Business Model

Netflix began as web-based catalog service that rented older movies in DVD format and delivered them by mail. Subscribers created a wants list on the Netflix web site, and for $19.95 per month received three DVDs by mail from the top of their list, with no return deadline or late charges. They kept the movies for as long as they wished, and then sent them back in postage-paid envelopes before receiving the next titles on their list. By 2003, Netflix had a 2% share of the market with 1 million subscribers and 15,000 titles in its library {1}

Competition came from Blockbuster and Wal-mart, who both introduced similar rental services, but Netflix focused on rental alone, and in 2005 accommodated the Wal-mart threat with a partnership arrangement whereby Wal-mart referred DVD rental customers to Netflix. {3} {4}

In 2007, Netflix introduced a service to deliver movies and television shows directly to users' PCs, not as downloads but as streaming video, which cannot be saved to memory. In doing so, Netflix entered a competitive marketplace crowded with a. large companies like Apple and Amazon, b. specific on-demand services like MovieLink, CinemaNow, and c. facilities increasingly provided by cable companies. The 'Watch Instantly' service nonetheless proved successful because Netflix: {11} {12}

1. Made deals with Disney, CBS and Epix for TV content, and with Relativity Media and others for movies. {14}
2. Introduced an 'all-you-can-watch' service for as little as $8.99 a month.
3. Introduced an 'unlimited TV and movies streaming' service to computer or TV for $7.99 a month in November 2010.
4. Separated the online streaming and DVD by mail services, pricing the first at $9.99/month, and the second at $7.99/month (for one out at a time).

Netflix is today the world's largest video and television-episode rental subscription service, operating 50 regional shipping centers across the US. The 2010 fiscal year saw revenues of $2.1 billion and a net income of $161 million. In the 2011 fiscal year these had increased to $3.2 billion and $226 million. {16} The corresponding 2012 fiscal year figures were $3.61 billion and $17.2 million. {16}

Points to Note

1. Exclusive focus on a small segment of the entertainment market.
2. Slim but improving net margins: 5.5% in 2007, 6.1% in 2008, 6.9% in 2009 and 7.4% in 2010. {16}
3. Increasing competition from Blockbuster, Amazon and iTunes.

Questions

1. What is streaming video, and what is its appeal?
2. How has Netflix grown its business?
3. What does Netflix tell us about ecommerce generally?
4. Analyze Netflix with the Osterwalder and Pigneur business model.

Sources and Further Reading

1. Netflix Script Spells Disruption by Sally Aaron. HBS. March 2004.
2. What Is Netflix's Greatest Threat? Interview with Reed Hastings. Motley Fool. February 2005.
3. What's Next for Netflix? Managing Technology. November 2006.
4. Netflix to Deliver Movies to the PC by Miguel Helft. NYT. January 2007.
5. High-tech Achiever by Jena McGregor. FastCompany. October 2007.
6. Casestudy: Netflix by Michael Rappa. Digital Enterprise. May 2008.
7. Netflix Announces Agreement With Disney-ABC Television Group to Stream Several Hit ABC Series. PR Newswire. August 2008.
8. Porter's 5 forces by Ryan Watson. Ryan Watson's Technical Blog. January 2008.
9. Netflix chief: DVD business to peak in 5 years by Greg Sandoval, CNET. May 2008.
10. Taking a Page From the Netflix Business Plan by Bookswim. Gather. June 2008.
11. It Feels like the First Time by Chris Albrecht. Business Week. February 2009.
12. A new plan for watching instantly, plus price changes to existing unlimited plans by Jessie Becker. Netflix Blog. November 2010.
13. Netflix Introduces New Plans and Announces Price by Jessie Becker. Netflix Blog. July 2011.
14. Netflix. Wikinvest entry.
15. Netflix, Inc. Funding Universe. Usual well-documented entry.
16. Netflix Annual Reports. Netflix. 2002-2010.
17. Netflix. Netflix rental homesite.
18. Netflix: valuation, not pricing, that's dubious. FT. September 2011. Recent developments at Netflix.
19. Netflix Business Model Faces Serious Challenges After Raising Rates, Again. WSJ. July 2011.
20. 2011 Compare Best Online DVD Rental Services. Top Ten Reviews. 2011. Netflix rated better than Blockbuster Online or iTunes.
21. Netflix to Launch in Norway, Denmark, Sweden and Finland in Late 2012. Yahoo Finance. August 2012.